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I’ve been recording certain interest rates on a weekly basis for several years, and it’s interesting to note that, for the first time in decades, the five-year swap rate fell to under 3%. (For the uninitiated, the swap rate is the rate at which banks will lend to each other.)
The significance for those who need Medical Equipment Finance or any other form of Asset Finance is that you should be able to secure a five-year loan at close to 5% (assuming that lenders need ~200 basis points for margin and risk).
Also for the first time, the best three-year and five-year term deposits are in ‘lock-step’ at 4.2%.
… as you can see below, the 90-day and 5-year swap rates are slightly higher. Some of my clients expect a decline in the Cash Rate will mean a lower rate for their Medical Equipment and other Finance. But, the banks set their fixed rates for fixed term loans based on their costs from week-to-week. The RBA Cash Rate is not part of those calculations.
The Bank Bill rates for 90-days and five years have barely moved over the last three months. Both are in the mid-threes. To the technical analysts among us, the chart appears to be bottoming out, and the next move is likely to be up.
Therefore, now is a good time to lock in a rate for Asset Finance and/or a fixed rate for Property Finance. We can get a three-year fixed rate for property that’s actually less than a heavily discounted variable rate. This unusual condition may also be a sign that the downward trend is coming to an end.
We hear and read about it all the time: the banks’ cost of funds justifies whatever move they make in their published or quoted interest rates. We also hear and read speculation about their true cost of funds. Having watched this closely for quite a while, I can report that most of their costs are in what they pay their local customers for deposits, such as savings accounts and term deposits. A much smaller, but highly publicized, source of funds is international markets.
The third source is what they pay each other to borrow funds, the most common measure of which is Bank Bill Swap Rates, which have fixed terms of 30 days to 5 years. The latter is the typical term for Medical Equipment Finance. So, what range of rates should we expect, assuming a 5-year facility for equipment finance?
I have it on good authority (a banker) that the majors’ cost of funds averages 70-100 basis points (0.7-1.0%) over the swap rate on any given day. Second tier lenders are still disadvantaged by our financial system to the tune of an additional 40-50 points. The 5-year swap rate last Friday was 3.54%, so if we add 100 points, the majors’ cost of funds was about 4.54%. They’ll typically seek a margin of 200 points, so I would expect them to quote a rate to their existing clients somewhere around 6.5%. The second tier lenders will be around 7%, but both rates will be higher for new clients or those with questionable risk profiles.
It’s not enough to be able to easily repay a loan. It’s not enough to pay on time. It’s not enough to have a high net worth. And, it’s not enough to have a position of respect within the community. For a smooth approval process, it’s all about your transparency and ability to document any and all aspects of your finances. That’s the only way to satisfy the lenders’ need to create a ‘Perfect Loan File’, according to Mark Greene in a recent article in Forbes. The meltdown in the real estate market in the U.S. was/is, of course, much worse than here, but the attitude of the banks is the same. If they can’t tick every box on their credit matrix on the first pass, the approval of our application will be slow at best.
So, the way forward is to accept the often redundant documentation requests, remembering that when we were kids, one of our parents’ favourite replies to “Why?” was “Because I said so.”
So, what’s the perfect loan? Well, it’s one that (a) pays back the lender and (b) pays back the lender on time. But, underwriting the perfect loan is not the goal that lenders aspire to today.
The real goal is the Perfect Loan File.
While all the attention is on the banks’ increasing home loan rates by up to 10 points, three have quietly raised rates for businesses by 30 points over the last two weeks. The fourth raised their rates for asset finance by 20 points.
Here’s an update on other rate movements, which appear to be reversing their downward trend.
When one lender is offering 3-year fixed home loans for under 6%, and another is offering 3-year term deposits for over 6%, you can have confidence that their margins are historically tight, and that genuine competition is back. That’s good news for consumers, but not necessarily for businesses.
Interest rates for asset finance and business loans have been in a slow downtrend in line with bank bills, which dropped this week by 20 points in response to the RBA’s cut of 25. Margins, however, remain at about 3%.